Brad Thomas
Founder & Lead Analyst of Wide Moat Research
McDonald's franchise model lets it collect twice on every sale while franchisees supply the capital, pay workers and manage food costs. Franchisees pay an initial fee, rent with a sales-based component and sales-based royalties, which brought $16.55B of franchised revenue last year. McDonald's is essentially the toll booth on the highway to fast-food profits. x.comÂ
McDonald's is a high-margin franchising platform that owns the tollbooths, collecting rent and royalties across more than 45,000 locations. It offers global unit growth, real pricing power and a real-estate moat in an operating business, harder to get wrong over a decade than Realty Income or Biglari Holdings. A return to normal valuation by end-2027 would mean about 30% annualized returns. Franchisee health concerns keep the multiple from a premium, and GLP-1 drugs are the wildcard. x.com x.com x.com x.comÂ
McDonald's is trading at its highest free-cash-flow yield in a decade, outside the COVID crash. x.comÂ
McDonald's is getting more interesting for dividend investors: its dividend has compounded about 14% a year for 26 years since 2000. x.comÂ
McDonald's remains a little too rich at 20x earnings for mid-single-digit growth, even though it is one of the best businesses ever created and will probably be around in 100 years. That holds despite its second-worst drawdown in 20 years, down 23.6% from its highs, per Fiscal.ai. x.comÂ
McDonald's looks attractive in one of its largest drawdowns ever, with its highest dividend yield in 11 years and its lowest P/E in six years. It was appealing at $247 and is a stock to commit to at $239. x.com x.comÂ
McDonald's business isn't stressed even though its chart is. The stock sits below its 200-week EMA, with momentum starting to turn bullish. x.comÂ
McDonald's is likely to see its metrics hurt over the next year by the rising cost of supporting struggling franchisees. Its rent and royalties hide franchisee pain: US same-store sales rose about 35% while prices rose about 40%, so traffic is likely shrinking, and sales growth slowed to 0.8% in Q2. Per their association, 95% of owners said Q1 profit fell. With remodels costing $400K-$700K per restaurant, McDonald's agreed to take on $8.5B through 2036 in lower rent and capex support. x.comÂ
McDonald's is basically a REIT, so dips like this are good buying opportunities for a long-term portfolio. The stock is 24% below the all-time high it set just a few months ago and trades near a two-year low. x.comÂ
Wingstop is the better franchise play than McDonald's. It offers more growth, better returns on capital, more attractive franchisee economics and a similar valuation, though it lacks McDonald's real estate advantage. x.com x.comÂ
McDonald's roughly $8.5 billion plan to help franchisees serve better food, improve service and simplify restaurants comes too late and will likely end the same way as Wendy's. Plunging real estate values add further pressure on McDonald's. x.com x.comÂ
Arcos Dorados is unlikely to benefit much, if at all, from McDonald's multi-billion-dollar spending plan to aid franchisees, because the plan is US-focused. Being a master franchisee like Arcos Dorados is a pretty raw deal. x.comÂ
